Science & technology

Tesla lost $700 million last year, so why is its valuation $60 billion?

Steve Blank, lecturer, Haas School of Business | June 14, 2017

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Automobile manufacturers shipped 88 million cars in 2016. Tesla shipped 76,000. Yet Wall Street values Tesla higher than any other U.S. car manufacturer. What explains this more than 1,000 to 1 discrepancy in valuation?

The future.

Too many people compare Tesla to what already exists, and that’s a mistake. Tesla is not another car company.

At the turn of the 20th century most people compared existing buggy and carriage manufacturers to the new automobile companies. They were both transportation, and they looked vaguely similar, with the only apparent difference that one was moved by horses attached to the front while the other had an unreliable and very noisy internal combustion engine.

They were different. And one is now only found in museums. Companies with business models built around internal combustion engines disrupted those built around horses. That’s the likely outcome for every one of today’s automobile manufacturers. Tesla is a new form of transportation disrupting the incumbents.

Here are four reasons why.

Electric cars pollute less, have fewer moving parts, are quieter and faster than existing cars. Today, the technology necessary (affordable batteries with sufficient range) for them to be a viable business have all just come together. Most observers agree that autonomous electric cars will be the dominate form of transportation by mid-century. That’s bad news for existing car companies.

First, car companies have over a century of expertise in designing and building efficient mechanical propulsion systems – internal combustion engines for motive power and transmissions to drive the wheels. If existing car manufacturers want to build electric vehicles, all those design skills and most of the supply chain and manufacturing expertise are useless. And not only useless but they become this legacy of capital equipment and headcount that is now a burden to a company. In a few years, the only thing useful in existing factories building traditional cars will be the walls and roof.

Second, while the automotive industry might be 1,000 times larger than Tesla, Tesla may actually have more expertise and dollars committed to the electric car ecosystem than any legacy car company. Tesla’s investment in Lithium/Ion battery factory (the Gigafactory), its electric drive train design and manufacturing output exceed the sum of the entire automotive industry.

Level 0: the car gives you warnings but driver maintains control of the car. For example, blind spot warning.

Level 1: the driver and the car share control. For example, Adaptive Cruise Control (ACC) where the driver controls steering and the automated system controls speed.

Level 2: The automated system takes full control of the vehicle (accelerating, braking, and steering). The driver monitors and intervenes if the automated system fails to respond.

Level 3: The driver can text or watch a movie. The vehicle will handle situations that call for an immediate response, like emergency braking. The driver must be prepared to intervene within some limited time, when called upon by the vehicle.

Level 4: No driver attention is ever required for safety, i.e. the driver may safely go to sleep or leave the driver’s seat.

Level 5: No human intervention is required. For example, a robotic taxi

Each level of autonomy requires an exponential amount of software engineering design and innovation. While cars have had an ever-increasing amount of software content, the next generation of transportation are literally computers on wheels. Much like in electric vehicle drive trains, autonomy and connectivity are not core competencies of existing car companies.

Fourth, large, existing companies are executing a known business model and have built processes, procedures and key performance indicators to measure progress to a known set of goals. But when technology disruption happens (electric drive trains, autonomous vehicles, etc.) changing a business model is extremely difficult. Very few companies manage to make the transition from one business model to another.

And while Tesla might be the first mover in disrupting transportation there is no guarantee they will be the ultimate leader. However, the question shouldn’t be why Tesla has such a high valuation.

The question should be why the existing automobile companies aren’t valued like horse and buggy companies.

Lesson Learned

Few market leaders in an industry being disrupted make the transition to the new industry

The assets, expertise, and mindset that made them leaders in the past are usually the baggage that prevents them from seeing the future

Comments to “Tesla lost $700 million last year, so why is its valuation $60 billion?”

I’m still on the fence with the Model 3, interiors should be driver centric allowing ease of use so the driver can stay focused. I also wonder if the interior is more an exercise in cost cutting then minimalist design. It would also have been nice if Tesla would have designed a decent key before giving up completely, and going with hotel key cards. But I like the exterior design, I’ve seen it on the road, it is very Porsche like. Most of all I’m glad it’s a sedan, I love hatchbacks but manufacturers need to cover all the automotive segments for electric success.

Tesla is a big mystery to me. It’s fantastic that the automotive industry is still evolving – and maybe it’s Tesla’s fault for that. But their cars have way too many technical issues and are too expensive.
If i am not wrong, at least 60 000 people have canceled their M 3 pre-orders – which is a bit frightening when calculating the financial loss. And it keeps getting worse. There must be something bigger than Musk’s name and money that keep the company’s evaluation so high.

Spain is on track to live up to its infrastructure plan to have every town of 50K or more people in the high-speed train network by 2020. The resource and economic efficiency benefits of this far-sighted plan will outshine anything the too-clever-for-their-own-good designers of private personal automobiles may come up with to keep us all distracted from the the really strange numbers — that 96% of the energy cars consume is not used to move content/passengers/people around, but to move the vehicles.

Using cars to move people around is like using a wheelbarrow to hold your ID card and cash, and then re-designing your homes, workplaces, and neighborhoods to accommodate wheelbarrows.

But wheelbarrows are so sexy and fashionable, you object, and I can make them slightly less polluting and slightly less inefficient if I devote even more research and ingenuity to making wheelbarrows smarter! I can’t afford to live where I can walk to the mass transit station, or bike to work/school, so I need my own wheelbarrow, and so does my spouse and my kid and my widowed elder — every person in our household _must_ have a wheelbarrow. So we must have enough parking space at home and at work and at school to let the wheelbarrows sit while we’re not using them 22 hours a day. — If you got rid of most of the wheelbarrows you’d be able to live close enough together to make mass transit a win/win, or walking a superior option.

Collecting vinyl records in the age of digital audio has become a minority pastime. It’s reasonable to expect that owning your own car, and planning cities around cars instead of around people, will be something that Millennials will also come to consider a minority pastime. Even so, our grandkids will look back at Tesla as another way their foolish ancestors tried to rationalize away their lack of vision.

15 companies currently sell electric vehicles that are rated by the U.S. Dept of Energy.
(fueleconomy.gov)

Tesla stock valuation is a HUGE bubble unjustified by any rational metric.

“Emotional and cognitive biases seem to be the causes of bubbles, but often, when the phenomenon appears, pundits try to find a rationale, so as not to be against the crowd. Thus, sometimes, people will dismiss concerns about bubble valuations by citing a new economy where the old stock valuation rules may no longer apply. This type of thinking helps to further propagate the bubble whereby everyone is investing with the intent of finding a greater fool.” (wikipedia)

Yea, but it has nearly doubled since this time last year. No fundamental analysis of TSLA gives it a 50 billion dollar market cap, but it’s at 62B right now. When tech flash crashed this week everyone was quick to call it a value play, but TSLA was largely unaffected and is already past its previous peak. Also TSLA will be seen as a luxury car company and will be able to have higher margins than competitors. TSLA’s mkt cap will be 150B by next spring and we’ll still be talking about how overvalued it is. Sometimes rationale and logic are your enemy and you just have to buy in set your stop loss and enjoy the hype.